Netflix, Inc. Stock Isn’t as Lovable as You Think

Although I’ve consistently championed NFLX, you have to know when to take profits

By Josh Enomoto, InvestorPlace Contributor

Source: Via Netflix

If you followed my work last year, you’ll know very well I love Netflix, Inc. (NASDAQ:NFLX). In my view, management makes the right decisions and it has a longer-term strategy. That’s what you need to compete in the intense streaming sector, which is why I’ve been bullish on Netflix stock. Overall, my views haven’t changed, but the circumstances certainly have.

No matter how awesome NFLX stock is, a bull market cannot last forever. At some point, you should take some profits off the table. We’re in this business not to make friends, but to make money. Lose sight of that objective, and you may end up on the wrong side of the trade. Again, this doesn’t mean I’ve switched over to the bearish side; however, NFLX has gone too far, too fast.

The issue isn’t the company. Their pricing strategy is brilliant, which should give satellite-TV providers DISH Network Corp (NASDAQ:DISH) and AT&T Inc. (NYSE:T)-owned DirecTV fits. Consumers love NFLX original programming, which will give Walt Disney Co (NYSE:DIS) pause. Just as importantly, they focus on international growth, and are tweaking their content accordingly.

I expect nothing less, and of course, Netflix stock has responded positively to prior developments. But year-to-date, NFLX shares are up over 67%.

Seriously, it’s time to secure these incredible gains.

Netflix Stock Jumped Ahead of Sales Growth

For this year, analysts forecast that NFLX revenues will haul in anywhere from $15.1 billion to $16.4 billion. The consensus estimate targets $15.9 billion. Whichever way you look at it, these are impressive numbers, and the streaming service has proven that it can deliver.

As you know, NFLX stock has skyrocketed in recent years due to the consistent revenue growth. Even at the lowest end of the forecast spectrum, Netflix will grow sales 29% against the prior year. Few organizations can call themselves so fortunate.

But my concern is that Netflix stock has already priced in the good news. Between 2014 through 2017, sales growth averaged 28.6%. Gains in NFLX shares averaged 44.3%.

Netflix stock, NFL, revenues

Last year, the average price for NFLX stock was $165.37, gaining 62% over 2016’s average of $102.03. In that same time frame, corporate revenues increased from $8.83 billion to nearly $11.7 billion, or 32.4% growth.

If we assumed that Netflix hit its high-end forecast of $16.4 billion, sales growth in 2018 will measure 40.3%. It’s a significant boost from 2017’s sales growth rate of 32.4%, which implies a lift for Netflix stock. However, the average price of NFLX in 2018 ($256.37) is already up 55% from the 2017 average! We haven’t even closed out the first quarter of this year!

Of course, we don’t have speed limit laws in the markets. NFLX could continue to jump higher. My view is that you have to be reasonable. I need to see something new and grand to justify this extraordinary outperformance.

Sub Growth Is Great, But Not That Great

One of the metrics that would change my mind about NFLX stock is if subscriber growth was veritably soaring. And for all practical intents and purposes, it is. But is it enough to justify this huge ramp up in the share price? I don’t think so.

I’m not trying to be a negative Nancy here because I’ve previously used sub growth as a bullish talking point. But for me to objectively state that you should have no problems jumping on shares that have rocketed 67% YTD, and by the way, we haven’t closed out the first quarter of the year? I’m sorry but I just can’t go there.

Netflix subs growth

Look at the growth stats. Yes, they’re incredibly impressive. Given the current trend, we’ll probably see 147 million subs by Q4 2018, or perhaps more. But since the start of 2016, sub growth has stabilized to just under 6%. That’s definitely lower than in 2012, when sub growth was slightly over 9%.

Furthermore, look at the year-over-year growth on a quarterly basis. Going back to at least Q4 2012, this curve has consistently declined. On a nominal basis, more consumers are flocking to Netflix. However, the velocity at which they’re doing so is declining as the company matures.

This is all totally normal. When I previously wrote my bullish stories on Netflix stock, I expected share growth to mature as well. Instead, they’ve gone well ahead of themselves. In my opinion, this is a clear indicator to protect yourself.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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